JPMorgan Loss Throws Republican Lawmakers Off Balance

Senator Richard Shelby, a Republican from Alabama, left, speaks with Senator Mike Crapo, a Republican from Idaho, during a hearing on Capitol Hill. Photo: Joshua Roberts/Bloomberg

May 18 (Bloomberg) -- Republicans in the U.S. Congress were
uniting behind a call to repeal all or part of the 2010
financial regulatory overhaul. Since JPMorgan Chase & Co.
announced its $2 billion trading loss earlier this month, that
front has splintered.

Some are seeking investigations, with Senator Mike Crapo of
Idaho among those calling on JPMorgan Chairman and Chief
Executive Officer Jamie Dimon to testify, which he has agreed to
do. Senator Richard Shelby of Alabama, the Banking Committee’s
top Republican, said the loss emphasizes the need for capital
standards for banks tougher than what the overhaul requires.
Senator Lamar Alexander of Tennessee says Congress has no
business getting involved.

The divisions point to a party torn by instincts to fix
problems as significant as the losses suffered by one of the
nation’s biggest banks, by a Tea Party-backed faction that seeks
to avoid any prospect of future bailouts, and by presumptive
Republican nominee Mitt Romney’s stance that one bank’s loss was
another investor’s gain.

“We need to get over the idea that every time a bank fails
or has a problem that Washington’s job is to bail it out or fix
it,” Alexander said.

Suspicious of Banks

Congressional Republicans may not be able to resolve their
differences on this issue, said Michael Franc, vice president of
government relations at the Heritage Foundation, a Washington-based research group that favors small government. While most
Republican lawmakers oppose strict regulation, more are becoming
as suspicious of big banks as they are of big government, he
said.

“One of the dynamics that’s emerged in the Republican
Party over the last decade or so is a growing populist feel,”
he said.

As Republican lawmakers split over their response to the
JPMorgan loss, Democrats are unified on their message: that the
trading loss underscores the need for tougher regulation of
banks.

“It’s one of those things that’s clear that they were
betting like you would do at the craps table in Las Vegas and
they bet the wrong way,” Senate Majority Leader Harry Reid, a
Nevada Democrat, said of the company’s loss this week. “That’s
fine if they did it with their own money, but the problem is,
the way Wall Street’s been working, is that heads they win,
tails we lose.”

‘JPMorgan Loophole’

Senators Carl Levin of Michigan and Jeff Merkley of Oregon,
the two Democrats who drafted the ban on proprietary trading
included in the Dodd-Frank Act, are increasing pressure on
regulators to tighten the so-called Volcker rule, which they say
has a “JPMorgan loophole.”

“Last fall’s proposed rule ignored the clear legislative
language and clear statement of congressional intent and allowed
for so-called ‘portfolio hedging,’” the lawmakers wrote in a
letter yesterday to the five federal regulators drafting the
rule. “Now, in recent days, we’ve seen exactly what ‘portfolio
hedging’ might mean.”

Dimon, who disclosed the loss May 10, told shareholders
there was no justification for the “egregious mistakes” by the
biggest and most profitable U.S. bank. In two lawsuits filed
this week in Manhattan federal court, shareholders sued the bank
and Dimon over the loss. He agreed yesterday to testify before
the Senate Banking Committee as it concludes hearings on
regulatory changes in June.

‘Way America Works’

Days after the bank’s loss was disclosed, Romney weighed
in. The former Massachusetts governor said business losses are
part of “the way America works” and urged caution in adopting
new rules in response.

“I would not rush to pass new legislation or new
regulation,” Romney said.

The matter puts Republicans in the position of deciding
whether to take action that will affect an industry that is a
top donor to the party. Congressional Republicans are
campaigning, with the election less than six months away, to
keep control of the House and win a majority in the Senate now
governed by Democrats, 53-47.

Campaign contributions from the banking industry were
almost evenly split in the 2008 presidential election year, when
Republicans reaped 54 percent of industry donations, according
to the nonpartisan Center for Responsive Politics, a Washington
group that tracks the influence of money on politics. That
improved for Republicans in 2010 as they sought to win control
of the U.S. House. In the 2010 election cycle, commercial banks
donated $9 million to federal candidates, 61 percent of which
went to Republicans.

PAC Contributions

JPMorgan’s political action committees donated $829,000 to
candidates, parties and political action committees between Jan.
1, 2011, and March 31, 2012, up from $459,000 in that period two
years earlier, Federal Election Commission records show.
Republican candidates have received 57 percent of the company’s
donations in this election cycle, compared with 43 percent for
Democrats.

Since the announcement of the loss, Republican lawmakers
have moved in different directions, with most calling for a
closer examination of what happened before tightening rules.

“You have to get all the facts on the table,” said
Senator Johnny Isakson, a Georgia Republican. “We’ve passed a
plethora of laws and regulations. I think we let it settle out
before we overreact.”

Representative Tom Cole, an Oklahoma Republican, said he
favors hearings “to make sure there is not a culture and
attitude that is threatening the stability of the entire
system.”

Tougher Capital Standards

Meanwhile, a few congressional Republicans, including
Shelby, are making the case that tougher capital standards are
needed beyond what is in the Dodd-Frank regulatory overhaul.

“I would certainly be in favor of starting to raise
capital requirements to make sure banks are secure,” said
Senator Ron Johnson, a Wisconsin Republican. “Then the taxpayer
won’t have to back it up.”

He said that doesn’t mean the government should break up
big banks. “If the markets determine that’s the best way to go,
that’s fine,” Johnson said.

Others are urging the government not to get involved,
particularly because JPMorgan’s solvency isn’t in question.

“Nobody has said that what happened created any kind of a
risk that bank couldn’t handle,” said Senator Saxby Chambliss,
a Georgia Republican, who said regulators can handle the matter
with the tools they have. “The CEO had to respond to
shareholders. There was no tax money at risk.”

Brown’s Letter

One Republican seeking re-election this fall has struck out
on his own path. Senator Scott Brown, a Massachusetts
Republican, sent a letter to Dimon this week, telling him he
should “impose financial penalties” on employees responsible
for the trading loss.

“It has been very frustrating to watch the continuing
volatility in our financial markets, and this $2 billion loss,
while painful, provides a good opportunity for JPMorgan to prove
that compensation practices have truly changed since the 2008
financial crisis,” Brown wrote to Dimon in a letter dated
yesterday.

Brown, one of three Senate Republicans who voted in favor
of the 2010 financial regulatory law, is seeking re-election in
a close race against the presumed Democratic nominee, Elizabeth
Warren, who advised President Barack Obama in setting up the
Consumer Financial Protection Bureau.

’Big Financial Scandal’

The differing responses among Republicans suggests that
there may not be enough votes in Congress to make any big
changes to the regulatory overhaul. Jaret Seiberg, a senior
policy analyst at Guggenheim Securities’ Washington Research
Group, said it may take one more “big financial scandal” to
galvanize Republicans around the notion of breaking up big
banks.

“When push comes to shove, the risk here is that you give
momentum to the break-up-the-bank faction,” he said.

Cole said Republicans were slow to discuss the JPMorgan
trading losses because “we’re obviously not for Dodd-Frank;
most of us voted against it.”

Still, he said, “people in both parties have been cautious
about commenting, in part, nobody knows if there is another shoe
to drop out there. It caught people by surprise.”